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The King of Guanxi
Sep 23rd 2004
From The Economist
Vincent Lo's career shows what it takes for an outsider to succeed in China
SIPPING tea in his penthouse office with sweeping views of Hong Kong harbour,
Vincent Lo does not look the sort who spends too much time roughing it in
mainland China. The 56-year-old's impeccably cut Mao-collared Blanc de Chine
suit and designer haircut disguise a man who spends three days a week dashing
between grimy cement plants and building sites in frantic Chinese cities. Yet
over the past two decades, with a relatively modest outlay of $1.5 billion, the
chairman of the Shui On Group has turned his building-materials and construction
firm into one of the most consistently successful foreign investors in China.
When it comes to parlaying social connections into business opportunities few can match Mr Lo. His avowed desire is to contribute to China's success and not just his own profits. This has earned him the trust of many of China's elite—and a nickname: “the king of guanxi [connections].'' How he built his empire says much about the realities of doing business in China.
That Mr Lo was the son of a successful Hong Kong property tycoon helped only indirectly. Unwilling to join the family firm, he was something of a black sheep. His mother had to beg her husband to lend their son HK$100,000 ($16,700) to start a company. Desperate to prove himself, he took risks: going into Shanghai in 1984 when few others dared. Mr Lo built a hotel with the city's Communist Youth League. It opened as students rioted in Tiananmen Square, occupancy plunged and the league could not repay its construction loan. “I helped out,” says Mr Lo. “They've never forgotten. Relationships are long term here.”
One of those who remembered was Han Zheng, the Youth League secretary and now mayor of Shanghai. Along with Xu Kuangdi, a former Shanghai mayor with whom Mr Lo established some of the first business links between Hong Kong and Shanghai, the pair helped Mr Lo win his biggest coup. This was the right to develop a piece of land surrounding the hallowed hall where the Chinese Communist Party held its first meeting. The $170m Xintiandi project involved building a two-hectare complex of restaurants, bars and shops in an elegant low-rise style. Xintiandi is now a prime entertainment spot and one of Shanghai's—and Shui On's—most important marketing tools. Foreign heads of state, such as Russia's president, Vladimir Putin, queue up to dine at the Clubhouse.
Xintiandi has so delighted central government and Shanghai officials (Wen Jiabao, China's prime minister, sometimes drops in for tea) that Mr Lo has won permission to develop an adjoining 50 hectares into luxury townhouses, offices and hotels. Although the project itself has produced pedestrian profits for Mr Lo, its halo-effect has enabled him to sell apartments there at high prices. And Xintiandi is proving a model for other aspiring cities in China. Mr Lo is building the next one, Xihu Tiandi, in Hangzhou, a city to the south-west of Shanghai.
But there is more to Mr Lo than property. Just as he was an early investor in China, he was also early to move inland from the prosperous coast. His political antennae told him that the country's leaders would be forced to develop the poor interior to balance explosive growth along the coast. And building needs cement. In 1995, five years before Beijing promulgated its “Go West” campaign, Mr Lo bought his first cement plant in Chongqing, a huge inland city. The timing was perfect; cement consumption has grown fast and Shui On is among the top three producers. Mr Lo believes he is unlikely to fall foul of recent measures to limit suppliers since he tends to buy up existing cement-makers rather than build new plants on greenfield sites. And he keeps local officials happy by promising not to fire workers.
His decision to invest in Chongqing was encouraged by the appointment of an old friend from Shanghai as the city's vice-mayor and later a former central-government minister as its party secretary. Mr Lo well understood that unless the interests of local and central government are aligned, foreign investors can get caught in the crossfire: Chongqing's previous mayor and party secretary had been at loggerheads. Reassured, he is now planning an urban redevelopment in Chongqing twice the size of Xintiandi. Wuhan, another inland city, will be next.
Seek no favours
That Mr Lo seems to have the run of China is partly explained by his extensive
connections. An honorary citizen of Shanghai since 1999, he is also a member of
one of the top advisory bodies consulted by central government. But he wears
this network of guanxi lightly. Of his old Shanghai friend, Mr Han, Mr Lo says:
“I've never asked him for any favours, that's why he is not afraid to see me.”
And he understands that China expects a lot back. Adrian Ngan, a property
analyst at BNP Paribas Peregrine, says: “No head of a Hong Kong company visits
China as much as Vincent Lo. When China sees the chairman so often, they believe
he is sincere.” Such intimacy built over decades can establish trust in an
unpredictable business climate. Mr Lo's contract for the huge Xintiandi project
was a mere six pages long. “Contracts in China allow for things to change,” he
says, smiling at the legalistic mindset of most foreign investors who get bogged
down in procedural detail. “Other developers scratch their heads and say ‘How
can we cope?’ I see change as an opportunity, not a threat.”
Yet despite these advantages, it is not clear whether Mr Lo can consistently make a good return in China. Cement margins are under pressure and relocating residents to make way for new developments is getting more expensive. And it is likely to take years before investments in luxury property in dirt-poor places like Wuhan and Chongqing pay off. Meanwhile, Mr Lo would be hurt badly if there were a crash in Shanghai's property prices. But that is the risk he takes. After 20 tireless years he has the ear of some of China's most senior policymakers, and that is something many outsiders will find hard to beat.